## The TAX SAVING in NPS – A Calculation

A lot of young earners are fascinated with the additional tax saving offered by NPS for an investment of Rs. 50000, every FY under section 80CCD(1b). Here I’m going to check the impact of TAX saving. Are we really saving tax today?
To get the answer or to start a calculation, few assumptions are made. Here are the assumptions for your kind considerations – the readers of this blog.

The investor aka NPS subscriber –

1. Age 30Y old at the time of first investment in NPS.
2. Only Rs. 50000 yly is invested at the start of year, here year means Financial Year.
3. The retirement is taken at age 60Y. So the total investment period is 30Y.
4. The corpus is growing at 12% rate in all these 30Y.
5. Total amount over these 30Y, invested in NPS is Rs. 1500000 (50000*30 = 1500000).
6. The maturity value of NPS at age 60Y is Rs. 13514630
7. The 40% corpus is withdrawn tax free. Another 20% is withdrawn taxable and remaining 40% is used to purchase annuity from LIC under it’s immediate annuity plan, where, the Annuity (pension) is payable Yly for both husband and wife and after death of both, the purchase price is returned to to nominee/legal heirs. Point to be noted, the data available on LIC site, showing an annuity rate of 6.3% (roughly) for age 60Y person.
 Investment year Maturity year Year to remain invested The growth rate @ 12% Growth multiple Amount Invested Corpus for each individual investment Tax saving in 30% tax slab. Tax saving in 20% tax slab. 2018 2048 30 1.12 29.95992 50000 1497996.1 15450 10300 2019 2048 29 1.12 26.74993 50000 1337496.5 15450 10300 2020 2048 28 1.12 23.88387 50000 1194193.3 15450 10300 2021 2048 27 1.12 21.32488 50000 1066244 15450 10300 2022 2048 26 1.12 19.04007 50000 952003.61 15450 10300 2023 2048 25 1.12 17.00006 50000 850003.22 15450 10300 2024 2048 24 1.12 15.17863 50000 758931.45 15450 10300 2025 2048 23 1.12 13.55235 50000 677617.36 15450 10300 2026 2048 22 1.12 12.10031 50000 605015.5 15450 10300 2027 2048 21 1.12 10.80385 50000 540192.41 15450 10300 2028 2048 20 1.12 9.646293 50000 482314.65 15450 10300 2029 2048 19 1.12 8.612762 50000 430638.08 15450 10300 2030 2048 18 1.12 7.689966 50000 384498.29 15450 10300 2031 2048 17 1.12 6.866041 50000 343302.04 15450 10300 2032 2048 16 1.12 6.130394 50000 306519.68 15450 10300 2033 2048 15 1.12 5.473566 50000 273678.29 15450 10300 2034 2048 14 1.12 4.887112 50000 244355.61 15450 10300 2035 2048 13 1.12 4.363493 50000 218174.66 15450 10300 2036 2048 12 1.12 3.895976 50000 194798.8 15450 10300 2037 2048 11 1.12 3.47855 50000 173927.5 15450 10300 2038 2048 10 1.12 3.105848 50000 155292.41 15450 10300 2039 2048 9 1.12 2.773079 50000 138653.94 15450 10300 2040 2048 8 1.12 2.475963 50000 123798.16 15450 10300 2041 2048 7 1.12 2.210681 50000 110534.07 15450 10300 2042 2048 6 1.12 1.973823 50000 98691.134 15450 10300 2043 2048 5 1.12 1.762342 50000 88117.084 15450 10300 2044 2048 4 1.12 1.573519 50000 78675.968 15450 10300 2045 2048 3 1.12 1.404928 50000 70246.4 15450 10300 2046 2048 2 1.12 1.2544 50000 62720 15450 10300 2047 2048 1 1.12 1.12 50000 56000 15450 10300 1500000 13514630 463500 309000

7. Now check the next table.   Here it goes.

 Tax free 40% withdrawal Taxable 20% withdrawal 40% Annuity purchase amount Yly annuity amount 5405852.1 2702926.1 5405852 340713 Tax @30% on withdrawal 835204.15 105280.3 Tax @20% on withdrawal 556802.77 70186.85

From the 2nd table How many of you can see the impact of TODAY’s TAX SAVING resulting in a larger TAX outgo tomorrow?
Point to be noted, the tax outgo on annuity is lifelong. Year after year, till the couple is surviving.

### 21 Responses to The TAX SAVING in NPS – A Calculation

If their income is below 500000 there won’t be any tax.

2. राहुल भारद्वाज says:

यँहा पर आपने एन्युटी पे टैक्स assume किया है
लेकिन आने वाले वक्त में जो आज 30 साल का है उसके लिए न्यूनतम टैक्स फ्री आय 300000 तो नही रहेगी अतः एन्युटी पे आपको कोई कर नही देना पड़ेगा (केवल उनके लिए जो नौकरी से सेवानिवृत्त हो रहे है 1200000 तक कि आय वाले) ।

• ashalanshu says:

Dear Rahul, at the retirement, will the retiree be having only this income and no other income? What about money received from NPS cash commutation itself? What about money from EPF, Gratuity, Leave Encashment, Superannuation? What about own saving and investments created over these working years?

Thanks

Ashal

• राहुल भारद्वाज says:

1.आप जब अपनी जॉब से रिटायर हो nps का एनकेशमेंट उससे आगे बढा दे (nps till 65)
2. जो 30%(15000) टैक्स सेविंग आज आपको मिल रही है उसे आप इक्विटी में निवेश करें ।(बोनस)
3.और एन्युटी से होने वाली इनकम गारंटीड रहेगी तो रिटायरमेंट प्लानिंग आसान भी होगी । इन्फ्लेशन के लिए आप 40% कार्पस को इक्विटी में निवेश कर सकते है ।

• ashalanshu says:

Dear Rahul,

1. Extending the NPS encashment age will not change the taxation of Corpus created within NPS or tax to be levied on Annuity.
2. That TAX SAVING is already invested in NPS. Where is the extra money in pocket to invest? – You invested 50000 in NPS, that’s how you didn’t pay 15600 in Tax. So that 15600 Tax amount with additional 34400 Rs. is already invested in NPS.
3. Annuity income is guaranteed but can’t be quantified today due to change in ANNUITY RATES in future. NPS is merely one part of corpus and most of us are having other investments also so diverting the tax free 40% withdrawal into Equity at post retirement age is not a sound choice.

Thanks

Ashal

3. Manisha says:

4. N M R Shreedhar says:

Unless the NPS maturity amount made tax-free, may not be wise to invest in it–maybe MF investments better , even with the 10% LTCG provision, Also there is no compulsory annuity purchase with MF investments. The down side is, of course you should have the discipline and patience to stay the course.–continue investing till age 60 and not pull out money in-between.

5. Salim says:

Nice information on the serious matter

6. kumarsamit says:

The basic flaw in this model is that it is not factoring in the NPV of tax savings. The way I look at it is that end of first year, I’ve actually invested Rs 34,550 (50,000 minus tax saved 15,550). Remember that money saved is money earned. And in return, end of first year, I’ve got Rs 56,000 for an investment of Rs 34,550. I would like to see how the story pans out over 30 years and then compare.

• ashalanshu says:

Dear Kumar, when you invest any amount in a tax saving scheme, the cash flow remains same. You are not paying 15450 Tax but investing 50000. It’s 34550+15450. After investing, are you really having, saved tax amount, in your pocket?

Think over it.

Thanks

Ashal

• kumarsamit says:

The cash flow reduces. Eg say my tax liability was Rs 10 lakhs. If I invested Rs 50,000 in NPS, my tax liability reduced by Rs 15,550. Therefore, I now paid only Rs 9,84,450 as tax.

• ashalanshu says:

Are you investing 50000 or 34550 in NPS?

• Anuj Saxena says:

Kumar has a point Ashal sir, I think when my tax out go reduces by 15540, my effective outgo for investment in nps goes down by same amount. Npv of this tax saving should he considered while weighing the option

• ashalanshu says:

Dear Anuj, are you investing 50K or 34400?

The 15450 – now 15600, supposed to go for tax is now in NPS. We are earning return on full 50K not on 34400. Where is the problem in it?

• kumarsamit says:

After 2 times back and forth, I’ve given up on this! One last time— Agreed that my outflow / investment is Rs50k in NPS but at the same time, my outflow / Tax has reduced by Rs 15k. These two need to be added up and then seen together for net monetary impact.

• ashalanshu says:

Dear Kumar and Anuj, Please look into from cash out flow point. If you are paying Tax, remaining 34400 is to be invested elsewhere. When you are putting 50K in NPS, it’s 15600+34400. The cash out flow is same.

Regarding the recounting of 15600 Tax saved and then money earned as return – are we not counting it already by putting full 50K in NPS?

• ashalanshu says:

Actually the answer, you people are looking at is lying in cash inflow, when you are redeeming money, how much return should one earn on 34600 to match the 50K NPS maturity amount.

That comparison ‘ll give you the thing, you people want to convey to me.

7. Abhishek Kumar says:

Hi Ashal Sir,

Considering now we have LTCG, is MF investment still better than investing in NPS. I got this doubt because I felt at least 40% of retirement corpus is tax free with NPS, whereas with MF whole corpus will be taxed at 10%. I may be wrong in my assumption, kindly enlighten me. I am currently investing in NPS 5000/- monthly mainly for retirement purpose and of course tax benefits. After reading your blog I am giving serious thought of stopping it and starting SIP of the same amount. But just wanted to be sure I am making right decision.

Regards,
Abhishek

• ashalanshu says:

Dear Abhishek, in case of Eq. or Eq. MFs, you are paying tax only on the LTCG amount and not on the base corpus. In NPS, you are paying tax on base corpus also. How it’s beneficial?

There is more to it. In case LTCG in Eq/Eq.MFs, you can adjust your ST or LT losses from Gains, but same is not available in NPS.

8. Kishorkumar says:

You have very well articulated the tax implications of NPS. Thanks for sharing.